The Uncharted Waters of 2026: Why Investors Should Rethink Their Strategies
For years, the word “unprecedented” has been thrown around with increasing frequency. But as we appear ahead to 2026, the US Federal Reserve may genuinely be venturing into uncharted territory – potentially cutting interest rates despite a robust economy and a weakening dollar. This unique combination of economic conditions hasn’t been seen in modern US economic history, and investors need to prepare.
A Strong Economy, A Weakening Dollar
The US economy is currently demonstrating significant strength. Nominal GDP recently exceeded 8%, the strongest growth in two decades (excluding the post-pandemic rebound). Estimates suggest that nominal GDP could remain above 7% in the coming quarters. Historically, the Federal Reserve has rarely cut rates when nominal growth is this high, and those instances were largely in the 1970s – a period investors are unlikely to desire to emulate.
Adding to the complexity, the dollar has been depreciating. The DXY Index has fallen roughly 10% over the past year. While the Treasury maintains a commitment to a strong dollar policy, rate cuts while the dollar weakens could signal a shift towards a “weak dollar” regime.
Inflationary Pressures Remain
Despite hopes of a return to the Federal Reserve’s inflation target, some indicators suggest persistent inflationary pressures. Surveys of slight business pricing intentions continue to trend upward. While artificial intelligence may be impacting certain sectors, it cannot currently replace the production of goods manufactured within the US, meaning prices for these items could rise as the dollar’s value decreases.
Navigating the New Landscape: Portfolio Adjustments
US investors have largely avoided significant exposure to non-US stocks, holding considerably less than their roughly 40% weighting in the MSCI All-Country World Index. Now may be the time to reconsider this allocation.
The Case for International Stocks
International stocks offer a compelling alternative. They currently demonstrate competitive earnings growth and provide a higher dividend yield – 2.5% compared to 1.2% for US stocks. Valuations are more attractive, with a price-to-trailing earnings multiple of 18 times versus 26 for American stocks.
Focus on Dividend-Paying Equities
“Shorter duration” equities – those less sensitive to interest rate changes – are too worth considering. Dividend yield is a useful metric for assessing equity duration; stocks with no dividends are more susceptible to interest rate fluctuations. While growth stocks have dominated recent investment strategies, the historical compounding of dividends has proven to be a reliable wealth-building tool. The S&P Dividend Aristocrat Index has delivered returns comparable to the Nasdaq over the past 25 years, with significantly lower volatility.
Frequently Asked Questions
- What is ‘duration’ in the context of equities?
- Duration, typically used for fixed income, can also apply to equities. It refers to a stock’s sensitivity to interest rate changes. Dividend-paying stocks generally have lower duration.
- Why is the dollar’s strength critical?
- A weaker dollar can lead to higher prices for goods manufactured in the US, potentially fueling inflation. It also impacts the returns for US investors holding foreign assets.
- Are US stocks still a good investment?
- US stocks remain a core component of many portfolios, but diversification into international and dividend-paying stocks can support mitigate risk in the current economic environment.
In this potentially unprecedented economic climate, a strategic shift towards non-US and dividend-paying stocks appears to be a prudent approach for investors.
Explore further: Read more about Federal Reserve policy on the Financial Times website.
